FINA 470- Chapters 8-11: Multiple Choice

Below are the net operating asset turnovers and net operating profit margins for companies that operate in three different industries (A, B and C). The industries are grocery stores, oil extraction and drug industry. NOPAT Asset Turnover Industry A 8.0% 1.5 Industry B 1.2% 5.5 Industry C 5.4% 1.0 Grocery Oil and Gas Drug A) B C A B) B A C C) C A B D) C B A

A) B C A

Which of the following statements concerning quality of earnings is correct? A. All other things being equal, the more cyclical the industry within which a company operates, the lower its quality of earnings. B. The smoother the earnings stream of a company, the greater the quality of the earnings. C. Quality of earnings is independent of business risk. D. Quality of earnings is largely beyond management's control.

A. All other things being equal, the more cyclical the industry within which a company operates, the lower its quality of earnings.

Which of the following statements is correct concerning changes from year 1 to year 2 at Tricrop? A. Despite favorable changes in the tax rate, return on net operating assets has decreased B. Despite favorable changes in net operating asset utilization, return on net operating assets has decreased C. Largely because of favorable changes in tax rates, return on net operating assets has increased D. Largely due to favorable changes in leverage, return on net operating assets has increased

A. Despite favorable changes in the tax rate, return on net operating assets has decreased

Which of the following is not a factor in producing earnings forecasts? A. Estimating the level of dividends B. Separation of recurring and nonrecurring components C. Recognizing potential earnings management D. Recognizing potential income smoothing

A. Estimating the level of dividends

Which of the following should be attempted in order to gauge the quality of a company's earnings? I. Assessing an adequacy of discretionary expenditures II. Assessing degree of conservatism in reporting assets III. Assessing degree of conservatism in reporting liabilities IV. Assessing degree of conservatism in application of accounting principles A. I, II, III, and IV B. I, II, and IV C. II, III, and IV D. I, III, and IV

A. I, II, III, and IV

Using LIFO rather than FIFO in a time of rising prices: I. lowers the current ratio. II. increases inventory turnover. III. increases profit margin. IV. increases debt to equity ratio. A. I, II, and IV B. I and II C. II and III D. I only

A. I, II, and IV

All other things being equal, if a company issues a 1% stock dividend, what is the effect on the following ratios? Total Debt to Equity/ Times interest Earned/ Financial leverage ratio A) No effect No effect No effect B) Increase No effect Increase C) Increase Decrease Decrease D) Increase No effect No effect A. Option A B. Option B C. Option C D. Option D

A. Option A

You are analyzing a stock. You expect that earnings will grow quickly relative to its current level, but the expected return on common stockholders' equity is low. Assuming price to be constant, what levels of the price-to-earnings ratio (PE) and the price-to-book ratio (PB) would you expect to see? PE Ratio PB Ratio A) Low Low B) Low High C) High High D) Low Low A. Option A B. Option B C. Option C D. Option D

A. Option A

Which of the following industries would you expect to have the highest inventory turnover? A. Restaurant B. Car dealer C. Jewelry store D. Department store

A. Restaurant

Which of the following ratios best measures the profitability of a company? A. Return on equity B. Gross margin C. Current ratio D. Net operating asset turnover

A. Return on equity

Which of the following is the best measure of operating efficiency? A. Return on net operating assets B. Return on equity C. Return on sales D. Return on inventory

A. Return on net operating assets

If a company is to successfully remain in business over the long haul, which of the following statements is most correct? A. Total cash flow from operations, measured over an extended period, must be positive. B. Total cash flow from investing, measured over an extended period, must be positive. C. Total cash flow from financing, measured over an extended period, should be negative. D. Total cash flow from financing plus total cash flow from investing, measured over an extended period, must be positive.

A. Total cash flow from operations, measured over an extended period, must be positive.

Which of the following statements is correct? A. Widget has higher RNOA than Tools. B. Widget has lower RNOA than Tools. C. Widget has same RNOA as Tools. D. Insufficient information to calculate RNOA

A. Widget has higher RNOA than Tools.

When calculating debt to equity ratio: A. convertible bonds should be treated as debt. B. convertible bonds should be excluded from debt but not included in equity. C. convertible bonds should be treated as equity. D. half the convertible bonds should be treated as debt, and the other half as equity.

A. convertible bonds should be treated as debt.

A profitable high-tech company would generally have: A. high price-to-book ratio and high price-to-earnings ratio. B. high price-to-book ratio and low price-to-earnings ratio. C. low price-to-book ratio and high price-to-earnings ratio. D. low price-to-book ratio and low price-to-earnings ratio.

A. high price-to-book ratio and high price-to-earnings ratio.

The total leverage ratio of a company will: A. increase if leases are capitalized. B. increase if a company sells its receivables. C. increase if a company sells more equity. D. increase if a company pays suppliers more quickly.

A. increase if leases are capitalized.

If a company's current ratio increases from 1.1 to 1.3 from one year to the next, it can be concluded that: A. the liquidity has increased. B. the current assets have increased. C. the current liabilities have decreased. D. None of the above

A. the liquidity has increased.

Which of the following increases when accounts receivable is sold? A. Current ratio B. Accounts receivable turnover C. Debt-to-equity ratio D. Acid test ratio

B. Accounts receivable turnover

Which of the following industries would you expect to have the longest operating cycle? A. Fast food industry B. Aerospace industry C. Discount retail store industry D. Utility industry

B. Aerospace industry

Which of the following statements is correct? A. Inventory was a use of cash for George in 2005. B. Current liabilities increased in 2005. C. George has a net outflow of cash in 2005. D. Restructuring charges were a use of cash for George in 2004.

B. Current liabilities increased in 2005.

Return on operating assets is a measure of which of the following? A. Profitability B. Efficiency C. Solvency D. Liquidity

B. Efficiency

Which of the following is not likely to be used to measure a company's liquidity? A. Working capital B. Financial leverage C. Current ratio D. Acid-test (quick) ratio

B. Financial leverage

All other things being equal, which of the following actions will achieve a company's wish to increase its financial leverage? I. Repurchase stock II. Issue more dividends III. Sell accounts receivable at face value IV. Split stock 2 for 1 A. I, II, and III B. I and II C. I and IV D. I, II, and IV

B. I and II

When considering the determinants of the price-to-book ratio (PB) which of the following is correct? I. All other things being equal, the greater a company's return on common stockholders' equity, the greater the PB ratio. II. All other things being equal, the greater a company's cost of equity, the greater the PB ratio. III. If a company's return on common stockholders' equity equals its cost of equity, the PB ratio should equal 1. IV. The greater a company's current earnings the higher the PB ratio A. I, III, and IV B. I and III C. II and IV D. I and II

B. I and III

Which of the following statements concerning the current ratio is true? I. It is always larger than the acid-test (quick) ratio. II. Companies can window-dress their current ratios. III. In isolation the current ratio has little meaning. IV. It is a good indicator of solvency of a company. A. I, II, III, and IV B. I, II, and III C. II, III, and IV D. I, II, and IV

B. I, II, and III

Which of the following statements is incorrect? A. It is possible for a profitable company to go out of business because of short-term liquidity problems. B. If a company has a current ratio greater than 1, it will never go out of business because of liquidity problems. C. The current ratio is always greater than or equal to the quick ratio. D. The accuracy of a cash flow forecast is inversely related to the forecast horizon.

B. If a company has a current ratio greater than 1, it will never go out of business because of liquidity problems.

Which of the following would explain an observed decrease in return on equity, all else equal? A. Decrease in tax rate B. Increase in interest rate on debt C. Stock split D. Stock dividend

B. Increase in interest rate on debt

Which of the following transactions or events would have no immediate effect on the times interest earned ratio but will cause debt to equity ratio to decrease? A. Issuing new debt B. Issuing new equity C. Having a stock split D. Recording large contingent liability for lawsuit

B. Issuing new equity

Which of the following is not likely to be the cause of a company's low accounts receivable turnover? A. Poor collection efforts B. Low price of product C. Customers in financial distress D. Delays in customer payments

B. Low price of product

Which of the following is not included in the definition of earnings persistence? A. Stability of the earnings B. Magnitude of the earnings C. Predictability of the earnings D. The earnings' trend

B. Magnitude of the earnings

Which of the following does not represent future expected cash inflows? A. Accounts receivable B. Prepaid expenses C. Inventory D. Notes receivable

B. Prepaid expenses

Which of the following is not a primary motivation for a company financing its business activities through debt? A. Trading on the equity B. Reducing earnings variability C. Tax deductibility of interest D. Avoiding earnings dilution

B. Reducing earnings variability

When calculating Acme's return on net operating assets in Year 2, which of the following adjustments to the asset base is most appropriate to consider? A. Accumulated depreciation adjustment B. Tangible asset adjustment C. Intangible asset adjustment D. No asset adjustment

B. Tangible asset adjustment

When a company is experiencing rapid growth, which of the following statements is the most correct? A. Cash flow from operations will be greater than cash flow from investing. B. The company will likely need more outside financing than if growth was slower. C. Cash flow from operations will be high due to rapid growth allowing company to pay down debt. D. Rapid growth will increase internally generated funds allowing higher dividend payments in periods of rapid growth.

B. The company will likely need more outside financing than if growth was slower.

Which of the following statements is the most plausible explanation of the difference in observed net operating profit margins? A. Widget Co's lower financial leverage B. Widget Co uses LIFO and Tools uses FIFO C. Widget Co's lower tax rate D. Widget Co's net operating asset turnover

B. Widget Co uses LIFO and Tools uses FIFO

Imagine FASB passes a new rule that required the capitalization of R&D. The effect for a drug company would be to: A. increase its current ratio. B. decrease debt to equity ratio. C. decrease working capital D. improve asset turnover

B. decrease debt to equity ratio.

Due to competitive pressures, Gertup has had to increase credit terms to customers to maintain sales. This resulted in Gertup's accounts receivable doubling from 12/31/04 to 12/31/05. The average accounts receivable turnover was 30 days. Without the increased credit terms, accounts receivable turnover would have remained at 12/31/04 levels. The impact of the change in credit policy was: A. none as sales remained the same. B. decreased liquidity and decreased available cash. C. increased current ratio and liquidity of the company. D. current ratio stayed the same and liquidity remained constant.

B. decreased liquidity and decreased available cash.

Purchases divided by accounts payable provides information about: A. capital structure. B. management of working capital. C. gross profit margin. D. profitability.

B. management of working capital.

The reasonableness and feasibility of short-term cash forecasts can be evaluated by preparing: A. bank reconciliation statements. B. pro forma financial statements. C. responsibility reports. D. interest coverage computations.

B. pro forma financial statements.

Which of the following is correct concerning changes at Tricrop from Year 1 to Year 2? RNOA ROCE A) Increased Increased B) Increased Decreased C) Decreased Decreased D) Decreased Increased

C) Decreased Decreased

Which of the following could explain a decrease in net operating asset turnover for a company? A. Switching from straight line to accelerated depreciation for financial reporting purposes B. An increase in the financial leverage of the company C. Addition of a new plant for production purposes D. Decrease cost of production inputs

C. Addition of a new plant for production purposes

Gupta Corporation has forecasted its need for external funding in the following year. It needs to raise $2 million in either debt or equity. It would like to minimize its need for external funding without decreasing its projected growth. Which of the following would reduce its need for additional funding? A. An increase in the dividend payout ratio B. An increase in days' sales outstanding C. An increase in accounts payable D. A decrease in inventory turnover

C. An increase in accounts payable

Which of the following items would not typically be included in the components of the current ratio? A. Inventory B. Accounts payable C. Capitalized software development costs D. Deferred charges

C. Capitalized software development costs

Gertup has increased its borrowing since last year, in part to finance the increased credit terms offered to customers. Which of the following actions would not decrease its borrowing? A. Decrease dividends paid B. Increase profit margin C. Change from LIFO to FIFO for inventory cost purposes D. Replace cash dividends with stock dividends

C. Change from LIFO to FIFO for inventory cost purposes

Which of the following will not affect the calculation of leverage ratios? A. Existence of operating leases B. Existence of assets where fair value is much lower than book value C. Existence of significant debt covenants

C. Existence of significant debt covenants

Which of the following is likely to be used to measure a company's solvency? A. Net operating profit margin B. Current ratio C. Financial leverage D. Cash to current liabilities ratio

C. Financial leverage

ABC Company is planning a major expansion for which it needs $5 million in external funding. It has various options as how to finance this expansion. Which of the following is correct? A. Future ROA will be higher if it uses all equity financing than if it uses some debt financing B. Future net income will be higher if it uses common stock rather than preferred stock to finance expansion C. Future ROA is independent of the form of financing D. Future net income is independent of the form of financing

C. Future ROA is independent of the form of financing

The cash flow from operations and cash flow from investing are both positive. Which of the following best describes the situation of George? A. The cash flow statement would indicate there are no reasons for concern. B. Repayment of long-term debt indicates the company is becoming more profitable. C. George appears to be liquidating assets of the company that may affect future profitability. D. Increased operating and investing cash flows in 2005, relative to 2004 indicate increased profitability of George in 2005.

C. George appears to be liquidating assets of the company that may affect future profitability.

When preparing a projected income statement, which of the following additional information, other than the financial statements would probably not be relevant? A. The competitive environment B. New versus old store mix C. Historical capital expenditure D. Expected level of macroeconomic activity

C. Historical capital expenditure

ABC Corporation and DEF Corporation operate in the same industry. ABC has a PE ratio that is 50% higher than DEF Corporation. Which of the following accounts for some of the difference in the observed PE ratios? I. ABC uses more conservative accounting principles. II. ABC has a higher cost of equity capital. III. ABC has higher expected future growth. IV. DEF uses FIFO and ABC uses LIFO. A. I, II, III, and IV B. I, III, and IV C. I and III D. II, III, and IV

C. I and III

Over time, what observation(s) best characterizes how ROE for a given firm should behave? I. ROE will increase because the firm becomes more efficient. II. ROE will decrease because competition will erode profitability. III. The answer depends on how conservative the firm's accounting policies are, which affects its reported earnings. A. I and III B. II and III C. I, II, and III D. None of the above

C. I, II, and III

Which of the following can affect earnings quality? I. Management's choice of accounting principle II. Management's choice of dividend policy III. Management's estimates IV. Management's discretionary expenditures A. I, II, III, and IV B. I, II, and III C. I, III, and IV D. I and III

C. I, III, and IV

Which of the following could cause return on net operating assets to increase, all other things equal? A. A decrease in interest rate on debt B. Increase in days accounts receivable are outstanding C. Increase in inventory turnover D. Decrease in gross margin

C. Increase in inventory turnover

Which of the following is least likely to increase the overall risk of a company? A. Increased sales variability B. Increased debt levels C. Increased variable costs while decreasing fixed costs D. Increased interest rates

C. Increased variable costs while decreasing fixed costs

Which of the following best describes the current ratio? A. Debt ratio B. Operating performance ratio C. Liquidity ratio D. Efficiency ratio

C. Liquidity ratio

When calculating Acme's return on net operating assets in Year 1, which of the following adjustments to the asset base is most appropriate to consider? A. Accumulated depreciation adjustment B. Intangible asset adjustment C. Non-operating asset adjustment D. No asset adjustment

C. Non-operating asset adjustment

When considering the difference between return on net operating assets (RNOA) and return on common shareholders' equity (ROCE), which of the following statements is incorrect? A. Preferred dividends are deducted from the numerator when calculating ROCE but not when calculating RNOA. B. RNOA is a pre-interest measure but ROCE is not. C. RNOA is a post-interest measure but ROCE is not. D. RNOA is independent of the form of financing but ROCE is not.

C. RNOA is a post-interest measure but ROCE is not.

Which of the following would be considered the most discretionary of the following cash outflows? A. Interest payment B. Payment to suppliers C. Repurchase of stock D. Administrative expense

C. Repurchase of stock

Which of the following is not a measure of a company's solvency? A. Total debt to equity capital ratio B. Short-term debt to total debt ratio C. Sales to assets ratio D. Long-term debt to equity capital ratio

C. Sales to assets ratio

Which of the following is incorrect when calculating the earnings to fixed charges ratio for a company? A. Interest expense is considered a fixed charge B. Long-term rental payments are often considered fixed charges C. Senior managements' salaries are normally considered fixed charges D. Preferred stock dividends are normally considered fixed charges

C. Senior managements' salaries are normally considered fixed charges

Which of the following situations is most likely to explain an accounts receivable turnover that is lower than the industry norm? A. The company makes less credit sales than industry. B. The company gives customers less time to pay than its competitors. C. The company has been selling inferior products to competitors. D. The company's reserve for bad debts is too high.

C. The company has been selling inferior products to competitors.

Which of the following situations is most likely to explain a net operating asset turnover that is higher than the industry norm? A. The company has more recently purchased fixed assets. B. The company uses FIFO while competitors use LIFO. C. The company uses the accelerated depreciation method while competitors use the straight line method. D. The company purchases more credit supplies than competitors.

C. The company uses the accelerated depreciation method while competitors use the straight line method.

Which of the following statements is incorrect? A. The quicker a company collects money from its customers the greater its liquidity, all else equal. B. The more quickly a company turns over its inventory, the greater its liquidity, all else equal. C. The lower a company's depreciation the greater its liquidity, all else equal. D. The greater a company's profit margin the greater its liquidity, all else equal.

C. The lower a company's depreciation the greater its liquidity, all else equal.

Widget has a higher EBIT/Revenue but lower net operating profit margin than Tool. Which of the following statements could explain this better as a percentage of sales? A. Widget has greater interest expense B. Widget has greater operating assets. C. Widget has higher taxes. D. Widget has lower interest.

C. Widget has higher taxes.

The short-term liquidity of a company: A. is only of concern to investors, not creditors, of a company. B. is determinable by looking at debt to equity ratio. C. depends largely upon prospective cash flows. D. is determinable by calculating cash to current liabilities ratio.

C. depends largely upon prospective cash flows.

Cost of goods sold divided by inventory provides information about: A. profitability. B. capital structure. C. management of working capital. D. gross profit margin.

C. management of working capital

Err Company has a major lawsuit against them for unsafe products. It recognizes a huge liability in 2004 of $300 million. The effect of this liability is to decrease stockholders' equity by 50%. In 2005, the effect of recognizing this liability, all else equal, is: A. return on net operating assets will increase dramatically. B. return on net operating assets will decrease dramatically. C. return on equity will increase dramatically. D. return on equity will decrease dramatically.

C. return on equity will increase dramatically.

The reliability of short-term cash forecast depends most heavily on the quality of: A. cost of goods sold forecast. B. current ratio forecast. C. sales forecast. D. shares outstanding forecast.

C. sales forecast.

If a company's current ratio increases from 1.2 to 1.4 from one year to the next, and its quick ratio decreases from 0.2 to 0.15 over the same time period, this indicates: A. the liquidity must have increased. B. the accounts receivable have decreased. C. the inventory management should be further examined. D. the current liabilities have decreased.

C. the inventory management should be further examined.

If Yutter's dividend payout ratio increased to 50% after year 1 then: A. the sustainable equity growth rate would increase. B. the return on equity would decrease. C. the value of the stock would decrease. D. the return on net operating assets would decrease

C. the value of the stock would decrease.

The earnings to fixed charges ratio: A. indicates how efficiently assets are used. B. typically includes depreciation in the denominator. C. typically excludes extraordinary gains and losses from the numerator. D. indicates the proportion of debt used to finance a company.

C. typically excludes extraordinary gains and losses from the numerator.

If a company's cost of capital increases unexpectedly, which of the following actions will help it maintain or increase its stock price? I. Decrease its asset turnover II. Increase its inventory III. Increase its gross margin IV. Issue a stock dividend A. I and IV B. II and III C.III D.I

C.III

Two companies, A and B, both have $1 million in assets, earnings before interest and taxes (EBIT) of $160,000, and the same tax rate. Company A is all equity financed, and Company B is 50% debt financed and 50% equity financed. If Company B's pretax cost of debt is 8%, then Company A will have a ROA that is _____ and a ROE that is _____ than Company B's. ROA ROE A) Same Higher B) Higher Higher C) Lower Lower D) Same Lower

D) Same Lower

Which of the following statements is most correct? A. The cheapest form of capital is equity. B. Companies with the highest current ratios have the most liquidity. C. The best indicator of short-term financing needs is the cash flow adequacy ratio. D. A faster growing company is more likely to need external financing than a slower growing company.

D. A faster growing company is more likely to need external financing than a slower growing company.

Which of the following is not a typical form of earnings management? A. Changing accounting estimates B. Offsetting one-time gains and losses C. Changing accounting principles D. Changing auditors

D. Changing auditors

Which of the following statements is correct? A. Company A has a lower ROA than Company B. B. Company A has a lower ROE than Company B. C. Company A has same ROE as Company B. D. Company A has used financial leverage to increase its return to its shareholders.

D. Company A has used financial leverage to increase its return to its shareholders.

Which of the following will increase the sustainable equity growth of a company, all other things equal? A. Increase dividend payout B. Pay suppliers more quickly C. Pay suppliers more slowly D. Decrease dividend payout

D. Decrease dividend payout

When assessing earnings persistence, it is important to analyze discretionary expenditures. Which of the following is correct? I. Research and development is generally considered a discretionary expenditure. II. Decreased discretionary expenditures should always be taken as a positive indicator that the company is getting costs under control. III. Advertising expenditures can be considered discretionary expenditures, which often have implications for future sales. IV. Absolute levels of discretionary expenditures are more important than the level of expenditures relative to sales. A. I, II, and III B. I, III, and IV C. II, III, and IV D. I and III

D. I and III

Other things held constant, which of the following actions would increase the need for a company to borrow money in the short-term? I. Extending more credit to customers II. Increasing accounts receivable turnover III. Expensing advertising expenses rather than capitalizing them IV. Contributing more to pension plan A.I, II, and III B.I and III C.I, III, and IV D. I and IV

D. I and IV

Which of the following statements about the equity growth rate is correct? I. The higher the ROCE the higher equity growth rate, all other things equal. II. The higher the dividend payout the higher the equity growth rate. III. The equity growth rate is unaffected by the cost of debt. IV. The equity growth rate indicates the expected growth in stock price each period. A. I, II, III, and IV B. I, II, and III C. I and III D. I only

D. I only

Which of the following is true of many debt covenants? I. Limit the issuance of additional debt senior to the obligation. II. Specify minimum levels of selected financial ratios. III. Specify minimum levels of earnings coverage. IV. Prohibit excessive dividends or stock repurchases. A. II and III B. II and IV C. I, III, and IV D. I, II, III, and IV

D. I, II, III, and IV

Pitfalls when forecasting earnings include failure to consider: I. capital adequacy. II. capacity constraints. III. anticipated return on equity. IV. dividend policy A. I and III B. II and IV C. I, III, and IV D. I, II, and III

D. I, II, and III

What is the correct order of the following steps in preparing a projected income statement (not all steps may be shown)? I. Project future net sales II. Project future net income III. Project future cost of goods sold IV. Project future interest expense A. I, II, III, IV B. II, IV, III, I C. I, III, II, IV D. I, III, IV, II

D. I, III, IV, II

What is the correct order of the following steps in preparing a projected balance sheet (not all steps may be shown)? I. Project future cash II. Project future accounts receivable III. Project future accounts payable IV. Project future property plant and equipment A. I, II, IV, III B. II, IV, I, III C. I, III, II, IV D. II, III, IV, I

D. II, III, IV, I

Which of the following statements is correct with respect to the times interest earned ratio? I. It is independent of operating income. II. It is independent of the interest rate paid on debt. III. It is independent of the tax rate. IV. It is independent of the amount of dividends paid. A. I, II, and III B. I and III C. I and IV D. III and IV

D. III and IV

Which of the following statements is correct? A. Restructuring is a major use of cash for George. B. Accounts receivable increased in 2005. C. Depreciation is a major use of cash for George. D. Major use of cash for paying long-term debt resulted in decreased leverage.

D. Major use of cash for paying long-term debt resulted in decreased leverage.

When calculating Acme's return on net operating assets in Year 3, which of the following adjustments to the asset base is most appropriate to consider? A. Accumulated depreciation adjustment B. Intangible asset adjustment C. Operating asset adjustment D. No asset adjustment

D. No asset adjustment

A company has significant uncapitalized leases. This company has a positive net income. If these were capitalized, the effect on the following ratios would be: Times interest earned/ Debt-to Equity ratio A) Increase Increase B) Increase Decrease C) Decrease Decrease D) Decrease Increase A. Option A B. Option B C. Option C D. Option D

D. Option D

All other things being equal, if a company increased its dividend payments, what would happen to the following ratios? Total Debt to Equity/ Times interest Earned/ Financial leverage ratio A) Same Same Same B) Increase Same Decrease C) Same Decrease Decrease D) Increase Same Increase A. Option A B. Option B C. Option C D. Option D

D. Option D

If a firm capitalizes a lease instead of treating the lease as an operating lease, the effect on the current ratio and the debt-to-equity ratio will be: Current Ratio Debt to Equity Ratio A) Increase Increase B) No effect Increase C) No Effect Decrease D) Decrease Increase A. Option A B. Option B C. Option C D. Option D

D. Option D

Which of the following statements about the relationship between RNOA and ROCE is correct? A. ROCE is always greater than RNOA B. ROCE is greater than RNOA, if RNOA is greater than after-tax cost of dividends C. ROCE is greater than RNOA, if RNOA is greater than cost of debt D. ROCE is greater than RNOA, if RNOA is greater than after-tax cost of debt

D. ROCE is greater than RNOA, if RNOA is greater than after-tax cost of debt

Which of the following is not a form of earnings management? A. Changes in accounting assumptions B. Timing revenue recognition C. Write-downs of operating assets D. Reporting fictitious transactions

D. Reporting fictitious transactions

Which of the following statements is correct? A. Net operating profit margin divided by net operating asset turnover equals return on net operating assets. B. Return on net operating assets can be disaggregated into net operating profit margin and leverage. C. Return on equity equals return on net operating assets less interest, net of tax. D. Return on equity can be disaggregated into net operating profit margin, net operating asset turnover and leverage.

D. Return on equity can be disaggregated into net operating profit margin, net operating asset turnover and leverage.

Which of the following would be least likely to affect the quality of receivables? A. Credit policy B. Right of return policy C. Collection procedures D. Sales commissions

D. Sales commissions

Which of the following statements is most correct? A. Common-size financial income statements provide information about major sources and uses of cash. B. Companies with the highest sales growth will have the fewest liquidity problems. C. Pro forma statements are the same as common-size statements. D. The more efficiently a company manages its working capital the greater its liquidity, all else equal.

D. The more efficiently a company manages its working capital the greater its liquidity, all else equal.

Which of the following statements best explains the difference in observed net operating asset turnover? A. Widget Co's lower financial leverage B. Widget Co uses FIFO and Tools LIFO C. Widget Co's lower tax rate D. Widget Co has significant operating leases and Tool Inc. has no leases

D. Widget Co has significant operating leases and Tool Inc. has no leases

A profitable mature company would generally have: A. high price-to-book ratio and high price-to-earnings ratio. B. high price-to-book ratio and low price-to-earnings ratio. C. low price-to-book ratio and high price-to-earnings ratio. D. low price-to-book ratio and low price-to-earnings ratio

D. low price-to-book ratio and low price-to-earnings ratio

If a company wishes to increase its current ratio, it could: A. take out a short-term loan. B. decrease accounts payable. C. increase useful life of machinery. D. sell a fixed asset.

D. sell a fixed asset.

Which of the following is the most useful in assessing short-term liquidity of a company? A. Taxes payable B.Retained earnings C.Next period's sales D.Prospective cash flows

D.Prospective cash flows

As per the definition of residual income model, what is the effect on stock price in a given period if the firm's cost of capital is greater than its return on equity? A.Cannot be determined B.No effect C.Stock price increases. D.Stock price decreases.

D.Stock price decreases.